Auditor fires back

City missed its own red flags in detecting Crundwell theft, Clifton says

DIXON – A defendant in the city's lawsuit against its auditors claims the city is to blame for ex-comptroller Rita Crundwell's theft of nearly $54 million.

The city of Dixon is suing the companies of CliftonLarsonAllen, Janis Card Co. and Samuel S. Card, CPA, and Todd Etheridge, Ron Blaine and Samuel S. Card for more than $53 million in damages, saying they should have detected Crundwell's theft.

An attorney representing the Card offices filed a response last month, saying the city was careless and negligent.

Clifton, one of the largest accounting firms in the United States, was contracted to do the city's audit before 2005, and continued to perform financial services for the city after that.

The suit claims CliftonLarsonAllen is guilty of, among other things, breach of contract, fraud and intentional misrepresentation and professional negligence.

CliftonLarsonAllen's document shifts most of the blame to the city.

In it, Clifton's attorneys say the commission form of government required enhanced levels of control and supervision by the city's elected officials, but they instead gave total control over the city's finances, its accounting, its bookkeeping, its cash and its Capital Development Fund to Crundwell.

Clifton said the city knowingly empowered Crundwell to exercise control over its cash spending by authorizing her to manually prepare and sign checks on the Capital Development Fund without any supervision.

The city was warned many times that Crundwell's empowerment should be countered by segregating duties performed by its personnel, Clifton said.

"The city's elected officials consciously, expressly and recklessly failed to implement any meaningful segregation of duties with respect to Crundwell's numerous job duties," the response said.

Clifton also said the city failed to exercise any control over capital development spending that was revealed by its own financial statements and reports.

"If the city's elected officials, appointed officers and/or department heads had bothered (to read the annual statements of expenditure) prepared and published by the city itself, during any of the years when Crundwell perpetrated her scam, they would have seen that millions upon millions of dollars were reported as having been paid by the city, out of the Capital Development Fund, to the 'water department' and/or to the 'Treasurer State of Illinois.'"

More than $32 million in those fictitious payments were, in fact, disclosed by the city, in its own official reports to the public, the document said.

Several of the annual totals ended in even numbers for the entire year, a characteristic of fraud, and the city failed to take action when its annual financial statements disclosed the names of fictitious projects. Both were used in the city's amended lawsuit as red flags auditors should have detected, the document said.

Furthermore, the disclosure of these payments contradicted Crundwell's excuse for the city's fiscal difficulties, which was that the state was chronically behind in payments.

The response also said the city failed to take proper action when it was budgeting for outlandish capital development spending beyond all proportion of the city's size, location, level of economic development and historical or planned capital development spending.

It quotes an email from Sterling City Manager Scott Shumard to FBI Special Agent Patrick Garry:

"... I thought (the city's annual financial reports) were so bad that they had to know what they were doing. In a commission form of government, to let this happen, the commissioners had to be aware of the fraud, or, as I suspect, entirely inept in their roles as commissioners," Shumard said.

The Clifton response also says the city's supervision of Crundwell was compromised because Mayor Jim Burke was conducting private business for profit in connection with Crundwell's purchase or sale of real estate, and because both City Engineer Shawn Ortgiesen and Fire Chief Tim Shipman had obtained interest-free, personal loans from Crundwell.

The response says the city knew Crundwell led a lavish lifestyle and that she was absent frequently.

The city also failed to detect whether the Cards were qualified to audit the city's financial statements, and unlawfully failed to seek competitive bids when it selected the auditor to replace Clifton.

Because the city withheld information, Clifton could not be expected to perform reliable service, the response said.

The city agreed by signing management representation letters that it was providing accurate information to its auditors. In those agreements, Clifton said the city would be responsible for maintaining a sound system of internal control, implementing controls to prevent fraud and safeguarding assets, among other things.

The response also says that if damages are awarded from Clifton, they need to be reduced by any amounts the city recovers from third parties, such as the estimated $10 million from the sale of Crundwell's forfeited assets.

"If the city sustained any damages (as alleged in its lawsuit), said damages were caused by the city's own negligence."

Clifton also claims a statute of limitations could come into play.

In an October deposition, Sam Card said he and his mother's small Sterling accounting office, which became Dixon's contracted auditor after 2005, did not do its own audit work. It only reviewed and signed off on audit work done by CliftonLarsonAllen.